The euro crisis

One problem, two visions (part I)

IT SEEMS odd, at first sight, to see the markets taking so much hope from two speeches in two days - one by France's President Nicolas Sarkozy and the other by Germany's Chancellor Angela Merkel - that revealed more differences than agreement on how to resolve the euro zone's debt crisis.

Perhaps it is the fact that both say the European Union's treaties should be changed, and any agreement on any subject is good news. Or perhaps it is the hope that, whatever they say in their opening bids, they will come up with enough of a deal at the next European summit on December 8th-9th to allow the European Central Bank to deploy its “big bazooka”.

Then again, markets have often rallied ahead of summits in the expectation of an agreement, only to be disappointed within days, or even hours, of the latest half-step being announced.

Neither Mr Sarkozy nor Mrs Merkel offered any real detail of what should be included in a revision of the treaties. But even their vague outlines reveal contrasting philosophies. I give a fuller analysis of the speeches in the next post (here). In summary:

- Mr Sarkozy places the emphasis on “solidarity” among European states (ie, joint Eurobonds, and no defaults or debt-restructuring after Greece), while Mrs Merkel gives priority to budgetary discipline and rules.

- Mr Sarkozy urges the European Central Bank to act; Mrs Merkel is jealous of guarding its independence

- Mr Sarkozy wants to create a hard core of euro-zone countries within the European Union; Mr Merkel wants to include as many non-euro states as possible

- Mr Sarkozy wants to Europe to integrate through the action of leaders (reproducing France's presidential system, with lots of discretion for the executive); Mrs Merkel favours more independent institutions like the European Commission and the European Court of Justice (more akin to Germany's federal structure, which retricts politicians' leeway)

These differences should come as little surprise. It has been ever thus in the EU. The Franco-German motor is not made for harmonious co-operation, but rather to manage and contain the many disagreements between Paris and Berlin.

Still, something has changed recently. In the past year, Mrs Merkel and Mr Sarkozy (“Merkozy”, as they are known) have tried to resolve their differences behind closed doors, and then issued a joint declaration setting out their position ahead of European gatherings.

This happened at the Franco-German summit in Deauville in October last year, when they agreed that private creditors should share the pain of rescuing collapsed economies. A year later, the two leaders claimed to have found “total accord” when it was patently untrue: they soon had to postpone the EU summit in October, and then held a second one days later, in order to overcome their differences over a second Greek package and how to boost the euro zone's rescue fund.

So now, just a week before a key summit of European leaders, Merkozy chose to set out their stalls separately, before meeting at a Franco-German summit on December 5th, that may find some kind of compromise.

Mr Sarkozy's appearance was, in effect, a campaign speech, with many barbs aimed at the opposition Socialist party as well as exhortations to fellow Europeans. He spoke at a party rally in Toulon, where in 2008 he had vowed to reform capitalism. Now he says it is time to reform the European Union. Mrs Merkel, by contrast, gave a matter-of-fact speech in the Bundestag to outline her negotiating position at the forthcoming summit.

In a sense, neither of these speeches really matters. Any new treaty, even a limited one, will take month to negotiate and, probably, years to ratify. What is important, in the short term, is whether European leaders come up a sufficiently credible promise to reform, and rein in those who break budgetary rules, to allow the European Central Bank to use its “big bazooka” more freely without fear of moral hazard.

Earlier this week, the ECB president, Mario Draghi, hinted that he might be willing to do so, if euro-zone countries reached a new "fiscal compact". He did not define it, and did not say treaty change was needed. Another hopeful sign is that Germany, while rejecting permanent Eurobonds, is now floating a proposal to mutualise, probably temporarily, all excesive debt above 60% of GDP.

This is not quite joint Eurobonds, but may set a precedent for them. In any case, for the first time Germany may be saying ja to something after months of nein. That would be something to cheer.

Nobody can blame Germany for its reluctance to bail out the more irresponsible members of the euro-zone. Too many commentators dismiss the Germans' wariness of inflation as a mere atavistic throw-back to their experience in the 20s. But the reality is that inflation erodes the living standards of the lower and middle classes by making life's essentials more costly. And any state that inflicts such a burden on its citizens had better have an extremely good reason for doing so.

Therefore we can only hope that this proposed 'fiscal union' has more teeth than the abysmal Stability and Growth Pact, i.e. that it contains blueprints for enforceable regulations that will prevent a recurrence of a crisis like this one. If there's one thing that the SGP proved, it's that you cannot rely on promises to rein in greed.

French politicians have failed for the last thirty years to come up with balanced budgets, yet they demand Germany to make it possible for them to keep piling up more debt, considering it is impossible to balance the books and say so to their electorate. I am grateful to German politicians for their stance on the Eurobonds and budget integration. Balanced books will eventually emerge from European monitoring. Sarkozy just needs to dress that up a little.

In this article Charlemagne really tries to empathize with the viewpoints of France and Germany instead of just bashing on them from a British viewpoint. That's really good journalism! I would like to read more articles like that, Charlemagne.

Yes, a moral hazard it is, when certain actors in the money game are enabled to get hands on an unlimited amount of money supply while all others must play by restrictive rules. That certain actors will use the money for spendings on anything that supports them keeping hold of their favourable position. It is quite easy to enumerate the countries where such a system has been established, but i leave that as an exercise to the reader.

I'm not in agreement with the article's opening paragraph ("IT SEEMS odd, at first sight, to see the markets taking so much hope from two speeches in two days - one by France's President Nicolas Sarkozy and the other by Germany's Chancellor Angela Merkel - that revealed more differences than agreement on how to resolve the euro zone's debt crisis") - I think that the markets have taken heart from this week's co-ordinated central bank interventions by the Federal Reserve, the Bank of England, European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada.

It is, I suppose, quite understandable that Germany doesn't want to pay for what it regards as the profligate members of the Eurozone. However the reason that everyone is looking to the Germans to bail them out of this crisis is because the Germans have been able to exploit a cheap Euro to sell their good Worldwide.

If the PIIGS had never joined the Euro would be trading at a far higher level -$2 to the euro is not unfeasible and Germany would not have been in anything like the position of a potential rescuer to-day. Those who think that a $2 rate is too far might like to think what's going on in the rest of the World. What currency other than a strong Euro would you put your money into to-day? The dollar? - it's been weak for years. The pound? Look at our deficit, the World's largest they say. The yen? - you must be joking! The yuan? Can you trade in yuans? Don't think so, otherwise the Chinese government couldn't keep the rate so artificially low. The rouble? - you really must be joking!

So it would the Euro at some painfully high level, and Germany would not have benefited in anything like the way it has. So, like the banks we need to think of what is the difference between what Germany has earned with the Euro with the PIIGS in, and what they might have earned if they were out. The difference is precisely what it's worth to Germany and how much they should be spending to defend the present Euro. And if they declared that (by whatever means they desired, ECB unlimited support, Eurobonds, a EUR 3trillion kitty) then the market's bluff would be called - and they probably wouldn't have to spend any of it.

So the question now is whether it really is in Germany's interest to make the PIIGS less profligate if they have been profiting from the status quo. Once the bad bear has been seen off the Eurozone has plenty of time to consider sensible reforms, like a market in tradable deficit tokens, in effect a form of insurance against deficits (so should be invested by the ECB to allow for a cheaper token price). Default in excess of the tokens you carry will get you swingeing fines laid down by statute and intended to discourage nations from going that way - to be deducted immediately from any cash transfers from the EU to the nation in question. That would include CAP moneys, of course. Persistent offence gets you suspended from participation in the euro - you have to issue your own scrip pro tem and nations are obliged to prepare for this. Again statute determines the trigger for this.

If tokens last for one year only, non-refundable, then the market price will be much lower than a deficit and the ECB credits the nation with the amount it's paid plus reinvestment profits and it all becomes an insurance scheme against defaulting, a bit like social security benefits. But you only see ECB support money if you agree to be done over by their economists and accountants. Here I'm sure the Germans would be happy to oblige...

The german vision of the EU is one of a disciplined and prosperous state. One where its citizens shoulder the burden of the excellent social service system theyave developed. The people need breathing room from failure (through free healthcare, essentially free higher education, well established and maintained infrastructure, etc.) Inorder to let their true ingunity shine in the economy. An economy where citizens are scrambling into mundane corporate positions to receive basic survival benefits (ie health care) and then forget their dreams for the sake of the job is a state living in fear. I the 21stpeople century economy, its not enough to have a bunch of cogs in the machine (we have plenty of developing countries for that, unless outsourcing your untouchable white collar jobs to india

The press is full of reports of the intransigence of the German position. I think they are missing the scenario that Merkel is setting up, with the 'collaboration' of Sarkozy (sorry, I didn't mean anything more by that word).

They are both actors on a play whose third act will end in further bondage of national sovereignty of all member states of the EU (or at least those in the Eurozone). Germany will get fiscal control of all Euro nations and Sarkozy will get a closer political union with a quasi-government in Brussels.

At that point they will both agree to allow further intervention by the ECB, regardless of treaty legality - since when that has stopped Brussels - in the form of loans and printing and/or Eurobonds.

Curtain Down. The people of 27 nations will stay out of the theater. No 'Referendums', please!
(I took this scenario from the piece "Bondage for Bonds: the Euro way" at http://www.robbingamericachronicle.com )

i don't know why this game between Merkozy has still conducted. Haven't they seen that market and investors need much more cooperation, integrity and solidarity than lack of agreement. Nowodays it is really not important what think Merkel or Sarkozy and what is their own opinions and propositions. Sometimes politicians should be a little bit smarter than markets and in spite of the differences show that they have common approach to crisis and solution is found. i don't why in the world of commonplace untruth which destroy the deep relationships in the community, this lie can't be used in order to spark more stability and give the relief for investors. Be more reasonable !!! Falsehood will not be wrong, if it make the eligible results. It is only right way to stop the speculation in the market of currencies, bonds end so on. !!!!!

Id like to apologize for the choppiness of my comment, its my first attempt commenting from a smartphone. Essentially people need to choose between two states. One where each citizen pays their way and receives a bountiful state with high quality public services. Or one where its everyman for himself, good luck fending yourself from big business (because we all know social welfare is at the top of their list), but at least we don't have to pay those dern. Taxes. The western world can't continue to foot a bill to the future and enjoy the spoils of both systems.

"A major problem is that France, culturally, is essentially a socialist-attitude country".

"Essentially socialist-attitude countries" - this is actually the problem of all eurozone countries in trouble right now, no matter if a Berlusconi, Sarkozy or Simitis precedes them.

On the contrary, Germany is culturally basically a free market society, no matter who precedes it. 'Social Democrat' Gerhard Schroeder was more of a free marketer than all the French, Italian or Greek 'Conservatives' put together.

It is interesting that both of these countries are semi-working together to solve this problem in the European economy, however, Europe should just drop the Euro and split the country in two, equally categorizing 2 sides of Europe (one with a mixture of countries with strong and weak GDPs and the other side with the same). If this were to happen, each side could use a different form of currency. Through starting two new currencies, the debt of each country would also carry over with them to which ever side they are placed on in this "new" Europe. That being said, each European country would have their chanced to almost "start over" in terms of strengthening this new currency.

"Does France even matter in this equation any more? I suggest not. So, is it then totally up to Germany? If so, I feel sorrow for our Southern European friends. Perhaps it is time just to scrap the entire idea?"

Why doesn't France try to form a “Currency Union of the South" together with its like-minded Southern European friends?

I agree with you that fiscal and economic prudence is not everyone's cuppa, but I do also understand that countries which demand 'alimentation' will lose some independence as long as this situation lasts. This is the same with all individuals or groups in any given society.

However, subordination creates unfriendly feelings toward the 'guardian', as also expressed by you here. It is not hard to foresee that politicians in your country will channel public anger toward what-will-be-called "the new masters" . . . a very undesirable situation for the latter, IMO.

I do understand that countries which demand 'alimentation' will lose some independence as long as this situation lasts. This is the same with all individuals or groups in any given society.

So, why all that pain? A prompt and speedy 'divorce' would probably be in the long-term interest of all.

A major problem is that France, culturally, is essentially a socialist-attitude country, thinking/feeling fundamental to all political parties, whatever their apparent position, left or right. While Sarkozy personally may have all the 'right' sort of ideas, he will, because of his upbringing in French politics, be imbued with basically welfare-statish kinds of beliefs, and, more importantly, have to carry a socialist-thinking country with him. (Especially with the presidential election coming up next year!)